Since its initial promulgation in 2015, the Clean Power Plan (CPP) has faced legal challenges.[1] There is considerable uncertainty about its future. This regulatory uncertainty likely has a negative effect on investment in renewable energy infrastructure. The Production Tax Credit (PTC) and Investment Tax Credit (ITC) have the potential to spur investment in renewable energy infrastructure even in light of the uncertainty surrounding the CPP. However, the regulatory uncertainty surrounding the future of the PTC, ITC, and CPP will likely have a negative impact on investment in renewable energy infrastructure.

The Environmental Protection Agency (EPA) promulgated the CPP in 2015 under Section 111(d) of the Clean Air Act (CAA), with the goal of reducing Carbon Dioxide (CO2) emissions.[2] Section 111(d) authorizes the EPA to require states to develop and implement plans to regulate the emission of air pollutants from stationary sources that are not regulated under Section 112 of the CAA (which addresses the emission of hazardous air pollutants).[3] CO2 is not regulated under Section 112.[4] Under the CPP, the EPA would provide states with guidelines for CO2 emissions within their state, and the states would be responsible for developing and implementing plans to meet these goals, relying on the best system of emission reduction (BESR). The EPA defined the BESR in the CPP to include substituting renewable energy generation for generation from fossil fuels.[5] At the time of promulgation, observers were hopeful that the CPP would increase the demand for renewable energy and accelerate investment in renewable energy infrastructure.[6] However, the CPP was challenged in court shortly after promulgation.

On October 23rd, 2015, West Virginia and 25 other states filed a petition in the D.C. Circuit Court of Appeals and submitted a motion to stay the implementation of the CPP.[7] The petitioners argued that the CPP exceeded the EPA’s authority under Section 111 because parts of the BESR did not directly regulate emissions and instead regulated generation from sources that the EPA “disfavored.”[8] The D.C. Circuit denied the motion to stay the implementation of the CPP on January 21st, 2016.[9] However, the Supreme Court granted certiorari, and stayed the implementation of the CPP on February 9th, 2016, pending a judgement on the merits in the D.C. Circuit.[10] Unusually, the Supreme Court did not provide a reasoning for its decision, although there has been speculation that the decision was influenced by political considerations.[11]

On April 28th, 2017, the D.C. Circuit granted the EPA’s motion to hold West Virginia v. EPA in abeyance while the EPA reviewed the CPP, and the court has continued to hold the case in abeyance.[12] On October 10th, 2017, EPA Administrator Scott Pruitt issued a notice of proposed rulemaking to repeal the CPP.[13] On the same day, the EPA submitted a motion to the D.C. Circuit to hold Washington v. EPA in abeyance until the conclusion of the proposed rulemaking.[14] The court has not yet ruled on this latest abeyance motion, but it would not be surprising if the court granted the motion given the court’s willingness to hold the case in abeyance since early 2017. Regardless of the court’s decision on the latest abeyance motion, it is clear is that the CPP faces an uncertain future in light of the ongoing litigation and the EPA’s proposed rulemaking.

The uncertainty about the future of the CPP has the effect of increasing the uncertainty surrounding investment in renewable energy infrastructure. Renewable energy assets such as wind farms and solar plants are long-lived, and their value to investors will decrease if the demand for renewable energy decreases. [15] Energy produced from renewable sources is indistinguishable from that produced by fossil fuel sources. When regulations that incentivize the utilization of renewable sources are reduced, renewable sources are forced to compete directly with fossil fuel sources, which can reduce the demand for renewable energy and put investors at “significant risk.”[16] Thus, perceived regulatory uncertainty reduces investment in renewable energy assets.[17] Because of this dynamic, “reducing uncertainty is a crucial component of effective renewable energy policy.”[18]

Even though the future of the CPP is uncertain, twenty-five states are still on target to reach their emission targets under the CPP, due in part to declining wind and solar costs and the multi-year extension of the PTC and ITC in 2015.[19] The PTC provides a $0.0184/kWh tax credit for qualified wind facilities, and the ITC provides a 30% tax credit for solar projects – both phase down gradually over several years (with a 10% ITC in perpetuity).[20] The gradual phase down of the PTC and ITC over many years enables the renewable energy industry to plan investments with reduced uncertainty, which helps to avoid the boom-and-bust cycles that have resulted from the previous expiration and renewal of the PTC and ITC.[21] Experts have asserted that the PTC and ITC “will drive renewable development with or without the Clean Power Plan,” although such development would likely have been greater under the CPP.[22]

The initial House of Representatives’ proposal for the Tax Cuts and Jobs Act of 2017 (Tax Act), however, threatened to reduce both the PTC and ITC. The house proposal would have reduced the PTC to $0.015/kWh while eliminating the ITC for any solar projects starting construction after 2027.[23] This proposal ultimately did not pass, but it affected the market. According to Greg Jenner, a tax attorney at Stoel Rives who works with renewable energy companies, “[t]he sad thing is, [the House proposal] create[d] uncertainty in the marketplace — just the fact that this proposal [was] out there.”[24] Even though the credits survived in the Tax Act, they could be on the chopping block in future tax reform.[25] More importantly, the Tax Act passed containing a controversial provision known as the Base Erosion Anti-Abuse Tax (BEAT). With the BEAT provision, tax equity investors that lower their tax burden through cross-border transfers to affiliates can only apply the PTC or ITC to 80% of their BEAT burden. Since it is difficult to estimate the BEAT burden before the end of each year, the BEAT creates additional uncertainty for tax equity investors when investing in renewable energy projects. [26] Thus, the ability for the PTC and ITC to drive investment in renewable energy infrastructure in lieu of the CPP may be diminished by the BEAT and the regulatory uncertainty surrounding the PTC and ITC.

The ongoing legal and political battles surrounding the CPP, PTC, and ITC create a high degree of regulatory uncertainty that is likely to have a negative effect on investment in renewable energy infrastructure, regardless of the outcomes of these battles. However, a combination of state-level initiatives and cheaper renewable energy technologies may drive the continued installation of renewable energy infrastructure even in the face of this regulatory uncertainty.[27]

*Gabriel VanLoozen is a Junior Editor on MJEAL. He can be reached via email at gsv@umich.edu.

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[22] Bryce Gary, Are Clean Power Plan targets out of reach for Western states?, High Country News, March 7, 2016, http://www.hcn.org/articles/are-clean-power-plan-targets-out-of-reach-for-western-challengers.

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The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

The Michigan Journal of Environmental & Administrative Law (MJEAL) is The University of Michigan Law School's newest legal journal. MJEAL is made possible by a generous grant from the Graham Sustainability Institute at the University of Michigan.

The journal publishes articles, student notes, comments, essays, and online blog posts on all aspects of environmental and administrative law.